II. Analysis - 2. What could be possible reasons? - a) Idea 1: Battery warranty

Question

Hello everyone,

I did not get why we multiplied the failure rate by the replacement cost of battery, while in case of failure, 5000 EUR is the cost of replacement, not 1100 EUR.

Answer 1

Hi there,

the company wants to cover the cost of such warranty. To do so, they calculate the Expected Cost, which is a function of

the cost per such incident (= $5,000 replacement cost); AND
the probability of such event happening (22%)

Think about it like an insurance - if only 22 out of 100 cars typically face such battery problem, then I will not incur replacement cost for all cars but only for the 22 where it actually happens.

Hope this helps.

Regards, Andi

Answer 2

Hi there!

To have a higher response rate here and also to get more out of the exercise, I'd recommend you give a first go to the answer yourself. Then we can chip in with feedback.

Best,
Cristian

Answer 3

They are selling warranty, which is basically insurance. The cost of insurance is the cost of a negative event * probability of said event

So the replacement cost is 5000€. But they will only incur at that cost 22% of the time. 78% of the time their cost will be 0€.

This is why you multiply 22%*5000€. On average, across all of their vehicle base, they will have a cost of 22%*5000€ per insured vehicle.

Answer 4

Hi there,

I'm super concerned by the fact that you've asked 3 questions on just 1 single case here.

(Please don't feel like you can't ask questions by the way!)

But it does sound like you could really use a reset in how you're approach math (learning how to figure it out yourself).

Consider getting a coach. Check out rocketblocks (for math/charts/exhibits only). Review how you approach math (learn to take a step back, break it down, and figure it out yourself in order to maximize learning)